Applying for a Mortgage: Your Credit History Evaluation

Thursday, May 8, 2014 -
Article by:
Lender411 Member

Your credit history will be the first thing a lender reviews whenever you apply for a mortgage. Your credit history reveals your tendencies as a borrower, and as lenders, we want as much information as possible about your financial life.

As lenders, we want to know how much do you owe? If you hold a mortgage, are current on payments? Are you current in all of your debt payments? Do you pay on time? Are there major negative events recorded in your credit history?

Small credit mishaps will show in your credit history, and you will have to explain in writing what events lead to the incident. You can qualify for a loan, even if you were late on your credit card payments a couple of times during the year prior to your application; but if you have an existing mortgage, you must show timely payments in the last 12 months. Most important of all, you must have no legal actions pending against you; this means no collections, liens or judgements.

If you have major negative incidents in your credit history, if approved, you will have a lengthier and cumbersome process. In a previous post, I wrote about the housing and debt ratio. In short, when your debt results in a debt to gross monthly income ratio that exceeds the maximum threshold allowed for a non-prime loan programs, you wont qualify for home loan, or you may have to go with higher priced mortgage programs.

There are some things you can do to overcome the problem of too much debt. The most obvious would be to hold out on the mortgage application, pay out some of your debt, and then apply. Another alternative would be for you to consolidate your debt, and spread out payments over a longer period of time to have smaller monthly payments. Then apply.

Now, if you have no credit et al, you are good as somebody with bad credit. The problem is that we as lenders have no ways to know how you behave when you owe money. If this is your case, you may still be able to get a mortgage if you apply for first time home buyer programs. The FHA has great first time home buyer programs for low-to-moderate-income borrowers. Also, you may be able to establish some credit history if you have receipts of rent and utility payments for at least a year.

Assuming you meet the minimum qualification requirements, when you apply for a loan, all of your information will be entered into a loan processing computing program that will compare your statistics to the aggregated statistics of millions of other borrowers who applied in the past. The aim of the program is to forecast the likelihood that youll default on your loan. If the program determines that your case presents a degree of risk, depending on this level, an underwriter may look at your case and try to determine whether there are factor that may possibly help you to qualify.

For example, your credit history may have an error, and if you can prove it, the underwriter may decide to manually approve your loan. Most loan processing computing programs will process the decision based on your credit history and score. Your credit score is also known as FICO. More or less, this FICO number is calculated by looking at your payment history, how much you owe, how long have you had lines of credit, how are you currently using your credit, and new lines of credit. All of these factors are mixed into an algorithm called the Fair Isaac Algorithm. A FICO score can range from 350 to 950, high risk to low risk respectively.

If you are working with a loan officer that pre-qualifies you, ask him/her to go over the credit report together. By reviewing the report together, you can identify any mistaken information, and/or handle negative incidents before he/she submits it to the underwriter. For example, if you a have a small collections account with a utility company, it would be best if you pay it, and hold on the application until the payment shows up in your report.

The following credit report negative incidences make it impossible to qualify for a loan:

bankruptcy, chapter 7 and chapter 11, although these vary

a judgement (collection action)

tax liens

more than 2 late mortgage payments in the last year

If you are applying for a home loan, the bottom line is you need a good fair-to-good credit report. If there errors in your credit report, you need to contact all of the credit bureaus to have it corrected. They will tell you what you need to do to correct errors in your report.